Contribution Rates and Plan Features: An Analysis of Large 401(k) Plan Data

Will workers accumulate adequate assets in their 401(k) plans to help fund their retirement? The answer to this question depends in part on the amount that they contribute. This Issue Brief analyzes contribution decisions among plan participants in three large 401(k) retirement saving plans. Specifically, it analyzes how plan features such as matching provisions and maximum allowable contributions, along with legal limits, interact with worker demographics in affecting contribution rates.

The findings provide stark evidence of the effect that plan features and legal limits can have on workers' decisions concerning their level of contribution to a plan. The most striking result is that for each cohort analyzed plan design directly impacted the contribution rate of 30 percent or more of the participants.

Older workers tend to have their contributions constrained by maximum limits (plan or legal), probably because they are more focused on retirement and thus more likely to contribute at higher levels. Many younger workers recognize the value of the employer match, contributing just enough to take full advantage of that plan feature but no more.

Plan features also appear to interact with worker earnings in determining contribution rates. Lower earning participants are more likely to contribute the maximum amount that is matched, taking advantage of all the "free" employer money that is available. Higher earners are more likely to contribute the maximum amount allowed by the plan or the tax code.

Employers' attention is often focused on the issue of getting workers to participate in 401(k) plans at levels that will lead to adequate retirement income. Such participation is also needed for the plan to pass discrimination testing. These findings would indicate that one way to boost worker contribution rates in a plan would be to increase the percentage of salary on which matching contributions are made.

With respect to policy, these findings indicate that legal limits constrain the amount that many individuals, particularly those who are older and more highly compensated, actually save for retirement through their 401(k) plan at a point when many are likely to be focusing on the need to save.